China’s Oil Trade Retaliation is Iran’s Gain

I’ve told you that once you start down the Trade War path forever will it dominate your destiny.

Well here we are. Trump slaps big tariffs on aluminum and steel in a bid to leverage Gary Cohn’s ICE Wall plan to control the metals and oils futures markets. I’m not sure how much of this stuff I believe but it is clear that the futures price for most strategically important commodities are divorced from the real world.

But today’s edition of “As the Trade War Churns” is about China and their willingness to shift their energy purchases away from U.S. producers. Irina Slav at Oilprice.com has the good bits.

The latest escalation in the tariff exchange, however, is a little bit different than all the others so far. It’s different because it came after Beijing said it intends to slap tariffs on U.S. oil, gas, and coal imports.

China’s was a retaliatory move to impose tariffs on US$50 billion worth of U.S. goods, which followed Trump’s earlier announcement that another US$50 billion in goods would be subjected to a 25-percent tariff starting July 6.

Things could get worse if the United States and China ratchet up their actions [counter-tariffs]. Mr. Trump has already promised more tariffs in response to China’s retaliation. China, in turn, is likely to back away from an agreement to buy $70 billion worth of American agricultural and energy products — a deal that was conditional on the United States lifting its threat of tariffs.

“China’s proportionate and targeted tariffs on U.S. imports are meant to send a strong signal that it will not capitulate to U.S. demands,” said Eswar Prasad, a professor of international trade at Cornell University. “It will be challenging for both sides to find a way to de-escalate these tensions.”

But as Ms. Slav points out, China has enjoyed taking advantage of the glut of U.S. oil as shale drillers flood the market with cheap oil. The West Texas Intermediate/Brent Spread has widened out to more than $10 at times.

By slapping counter tariffs on U.S. oil, that would more than overcome the current WTIC/Brent spread and send Chinese refiners looking for new markets.

Hey, do you know whose oil is sold at a discount to Brent on a regular basis?

Iran’s. That’s whose.

And you know what else? Iran is selling tons, literally, of its oil via the new Shanghai petroyuan futures market.

Now, these aren’t exact substitutes, because the Shanghai contract is for medium-sour crude and West Texas shale oil is generally light-sweet but the point remains that the incentives would now exist for Chinese buyers to shift their buying away from the U.S. and towards producers offering substitutes at better prices.

This undermines and undercuts Trump’s ‘energy dominance’ plans while also strengthening Iran’s ability to withstand new U.S. sanctions by creating more customers for its oil.

Trade wars always escalate. They are no different than any other government policy restricting trade. The market response is to always respond to new incentives. Capital always flows to where it is treated best.

It doesn’t matter if its domestic farm subsidies ‘protecting’ farmers from the business cycle or domestic metals producers getting protection via tariffs.

By raising the price above the market it shifts capital and investment away from those protected industries or producers and towards either innovation or foreign suppliers.

Trump obviously never read anything from Mises, Rothbard or Hayek at Wharton. Because if he did he would have come across the idea that every government intervention requires an ever-greater one to ‘fix’ the problems created by the first intervention.

The net result is that if there is a market for Iran’s oil, which there most certainly is, then humans will find a way to buy it. If Trump tries to raise the price too high then it will have other knock-on effects of a less-efficient oil and gas market which will create worse problems in the future for everyone, especially the very Americans he thinks he’s defending.